Bank-bashing season

Whoever said bipartisanship was dead? Banks are about to have their regular outing as the bad guys, with both government and opposition agreeing the big four absolutely must pass on the Reserve Bank of Australia’s rate cut of 0.5 of a percentage point in full.

Small business and unions, not usually the closest of allies, are also insisting the banks have no excuse to do otherwise.

Lost in the noise is the evidence that the RBA was well aware that the banks would be unlikely to pass on the full reduction.

That is because of the banks’ increased funding costs relative to the middle of last year, a point the RBA was careful to point out in its statement. Not that the individual banks were allowed to predict their reaction out loud, of course.

That’s called “price signalling’’, remember, and officially banned by the government and with the backing of the Liberals.

But that knowledge did at least make it easier for Australia’s central bank to give a big half a percentage point push to a struggling domestic economy on Tuesday. And that level of reduction will, in turn, now help that most precarious and precious of commodities – confidence.

It took a relieved
Wayne Swan
less than half an hour to claim credit, largely on the basis that the government’s responsible approach to the budget had made the size of the RBA’s move possible. He also eagerly repeated how much lower the cash rate was now than it had been under the Howard government.

The unfortunate little matter of a global financial crisis in between then and now didn’t seem to deter his analysis.

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The RBA didn’t quite see it that way, focusing instead on the fact that economic conditions had been somewhat weaker than expected, and inflation had moderated.

That’s central banker speak for “oops’’.

Its statement said that it would be desirable for financial conditions to be “easier’’ than those during last December – when it last cut rates by a more typical 0.25 of a percentage point.

(And since then, of course, the banks have independently put up their standard mortgage rates a little, by about 0.09 of a percentage point, on average, infuriating the public and politicians alike).

RBA governor
Glenn Stevens
said this made it necessary to cut by 0.5 of a percentage point “in order to deliver the appropriate level of borrowing rates". Did you hear that nuance, Wayne? Tony?

Oh well, never mind.

The banks will certainly get it and realise they have more political and margin leeway than they had feared to hold back some of the reduction – perhaps up to 0.15 of a percentage point.

Not that any one of them will want to go first or be seen as the biggest meanie in banker land. As usual, it may take a few days of trying to bluff someone else into taking the brunt of the inevitable political attack.

But with new mortgage lending not even worth the cost of funds over the past few months, the notion of any of the big four making the full sacrifice on rates is expected to prove a temporary fantasy.

The RBA will also attract some blame for leaving it too late to counter the growing evidence of weakness in much of the economy after having consistently overestimated growth and inflation.

Others will suggest the RBA is now too complacent about inflation in the non-traded sector of the economy – education, utilities, health, transport – especially when domestic demand has been running at its fastest level in four years, gobbling up cheap imports.

This has been disguised by the lower than expected inflation in traded goods, thanks to the strength of the currency, and the big one-off price falls in fruit and vegetables in the March quarter.

But the decision to go for a bigger reduction than normal means the RBA has now taken the chance to get ahead of expectations rather than follow them at a time when confidence is so shaky.

That can only be a good thing for business and households alike.

The risk is that it could signal a touch of alarm from the RBA. Apart from the huge falls in the depths of the financial crisis, the bank hasn’t cut by more than 0.25 of a percentage point at a time in more than a decade.

But this really only confirms what the street already knows. Pick a sector – retail, housing, tourism, manufacturing, non-mining construction – and the mood is grim and getting grimmer.

Add in the lack of faith in anything predictable coming out of Canberra other than a budget next week that will cut spending and raise taxes.

No matter what else happens inside Labor and its benighted leadership, that certainty alone will further depress consumer and business confidence.

In that sense, the size of this cut is an antidote to what’s coming as well as what has been.